Revisiting the asymmetry between the exchange rate and domestic production in South Asian Economies: Evidence from Nonlinear ARDL Approach

Abstract

: Many of the early studies that investigate the impact of exchange rate movements on domestic production report mixed findings in terms of the effect on economic growth. However, the majority of these studies had were limited in that they relied on a prior assumption of linear adjustment of the exchange rate fluctuations toward domestic output. We suspect that a prior assumption of linearity may mask the empirical results. We, therefore, bring nonlinearity into the adjustment process through the partial sum approach to the exchange rate by decomposing the exchange rate into depreciation and appreciation. We investigate both the symmetric and asymmetric effect of exchange rate changes on economic growth of the selected South Asian economies. Our results show significant evidence of the asymmetric effects of exchange rate changes on domestic production both in the short and long run in the case of all the selected economies.

Asymmetric response of domestic production to exchange rate changes: Evidence from southeast Asian countries

“…For instance, according to Bahmani‐Oskooee, Halicioglu, and Mohammadian (2018), both PREX and NREX have expansionary impacts on domestic output. Iqbal et al (2022) provide substantial evidence demonstrating the asymmetric impacts of exchange rate variations on domestic output, both in the short and long terms, across all economies studied. According to Bahmani‐Oskooee and Arize (2020), results differ by country.…”

Asymmetric Impact of Real Effective Exchange Rate Shocks on Economic Growth in Africa: Evidence From Symmetric and Asymmetric Panel ARDL-PMG Model

“…They further find that appreciation negates domestic production for some of the sample countries while a depreciation exerts no impact. Iqbal, et al (2022) using the nonlinear ARDL model and data from 1980 to 2019 for South Asian countries, explored the impact of exchange rate changes on domestic production. They decomposed the exchange rate into depreciation and appreciation to introduce nonlinearity into the adjustment process.…”

“…Most of the earlier studies used models that assumed the relationship between the real effective exchange rate and economic growth is linear. However, recent studies, including Iqbal, et al (2022), Bahmani-Oskooee and Arize (2020), and Eroğlu and Olayiwola (2023) have shown that the relationship between the real effective exchange rate and national output is better modeled in a nonlinear fashion. The present study contributes to the debate on the impact of the real effective exchange rate on economic growth by employing the nonlinear panel ARDL-PMG estimator proposed by Shin et al (2014).…”